Exxon Faces a Dilemma on Chad Project
World Bank-Backed Plan to Avoid 'Oil Curse'
Could Unravel Amid Dispute Over Royalties
By CHIP CUMMINS
February 28, 2006; Page A4
In the late 1990s, Exxon Mobil Corp., the World Bank and Chad hammered out a deal that was held out as a model for how to avoid the so-called oil curse, in which a nation's oil wealth often leaves its people no better off -- and sometimes worse.
But that deal is now crumbling, and Exxon finds itself caught in the middle of a fight between the bank and Chad as the company debates what to do with as much as $50 million of oil revenue it owes the country. The standoff has big financial stakes for the petroleum industry, the poor African country and others like it.
Exxon has two choices, both bad: hold back the money, which could lead Chad's government to shut down production at the company's operations there, or hand it over, which could land Exxon in hot water with the World Bank and nongovernmental-agency activists.
The money represents two months' worth of oil royalties owed to Chad by an Exxon-led consortium. In the past, the payments went to an escrow account set up as part of a unique deal between Chad and the World Bank that mandates how most of the country's share of revenue is spent. In exchange for throwing political and financial support behind the project, the bank mandated that Chad's leaders spend most of the proceeds on development projects -- schools, health care, roads and the like -- rather than line their own pockets.
But Chad's Parliament recently loosened the spending restrictions, and the World Bank froze the account. Negotiations in Paris between the bank and Chad broke down this month, and Exxon for the time being is holding the payments for January and February in a separate account.
The money amounts to about $20 million to $25 million for each month, according to people familiar with the situation. That is pocket change for the American oil giant and its consortium partners in the project; last quarter, Exxon posted a profit of just above $10 billion thanks to today's superhigh energy prices. But for cash-strapped Chad, it's worth fighting for.
Chad recently signaled it would order Exxon to shut down production if it doesn't release the royalties directly to the government, according to one person familiar with the situation. That would throw into question the future of the $4.1 billion oil project -- one of the biggest private-sector investments ever in sub-Saharan Africa. Exxon's partners in the project are Chevron Corp. and Malaysian state energy company Petronas.
The World Bank and many advocacy groups want Exxon to stick to the original agreement, to underscore the importance of transparent handling of oil revenue in developing nations. Exxon and the oil industry have touted the deal as a model for fostering corruption-free natural-resources industries. In many countries, officials waste or siphon off oil revenue.
Industry executives and bank officials had envisioned similarly structured deals in other regions. The hope was that this approach might help all parties by preventing political corruption and the ensuing resentment by local populations that see little benefit from resource extraction. In Nigeria, for example, oil companies have been hobbled for years by increasingly violent attacks on their facilities and personnel.
Under the original deal, Exxon deposited royalties into the escrow account. That "was and is the best way to ensure that the revenue flows are transparent and that the objectives of the project are honored over time," said Ali M. Khadr, the World Bank's country director for Chad. "At the same time, we recognize that Exxon and their consortium partners are in a difficult position."
The standoff is one of the latest examples of how resource-rich countries are pressuring oil companies for a bigger cut of profits amid today's super-high prices.
Venezuela and Bolivia, amid fiery nationalistic rhetoric, are extracting higher payments from foreign participants in their oil and natural-gas fields. Britain is jacking up tax rates on oil producers in the North Sea. The U.S. Congress is re-examining the way it collects oil revenue amid a furor in Washington over generous royalty-relief measures.
Just over two years ago, a consortium led by Exxon started pumping oil out of land-locked Chad through a 650-mile pipeline that can move more than 200,000 barrels of oil a day. An integral part of the project was a one-of-a-kind deal between the World Bank and Chad, requiring the country to spend most of its revenue from the project on development -- including education, health and social services -- overseen by a committee of Chadian religious, political and community leaders.
By earmarking oil revenue, executives and international development officials hoped to avoid the oil curse, in which oil wealth leads to corruption and more poverty. The restrictions were enshrined in law by Chad's Parliament. But the legislature in late December relaxed those spending restrictions amid a budget crunch and a growing armed rebellion against President Idriss Deby.
Chad recently increased the stakes for Exxon. Mr. Deby said earlier this month that he wants to renegotiate the terms to get Chad a bigger share of the revenue pie. A representative of Chad's government wasn't immediately available for comment.
Susan Reeves, an Exxon spokeswoman, said in an email response to a list of questions that the company is in discussions with the World Bank and Chad and is "hopeful that this dialogue will help resolve outstanding issues between the two parties."
She declined to address the specifics of the discussions, but said Exxon continues to believe the "structure and framework" of the World Bank deal is "sound and should be retained," she said.
A breakthrough in talks between Chad and the World Bank could offer Exxon a way out of the dilemma. Despite the inconclusive talks in Paris, the World Bank and Chad's minister of finance are in regular contact. The bank has proposed a mission to Chad to work out the problem, but Chad so far hasn't agreed to the terms.
